RE: It's the Rule 16a-1(f) definition. The NYSE addresses this issue in the FAQs on 303A that are posted in the "NYSE Guidance" Practice Area on TheCorporateCounsel.net.
-John Jenkins, Editor, Compensationstandards.com 3/28/2021
RE: I don't think Reg S-K CDI 230.13 is intended to expand the coverage of Item 404 below the $120K threshold. I think it is simply intended to illustrate the limits of Instruction 5a to Item 404(a) and show that there may be situations where an executive officer's compensation may not have to be disclosed but the non-executive officer child's may need to be.
I agree that Item 404 requires the disclosure of the amount involved in a related party transaction, and that statements to the effect that an individual's compensation "exceeds $120K" don't appear to fully comply with the requirement.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 3/4/2021
RE: Thank you for the thoughtful, clear response. I hoped and figured as much.
The interplay of S-K 402 and S-K 404 is an odd (and complicated) phenomenon.
-3/5/2021
RE: The Staff distinguishes between "consultants" and "quasi-employees." I think individuals who provide services in the typical leased employee arrangement would be regarded as quasi- or de-facto employees. As discussed in our Form S-8 Handbook, those persons would have to satisfy certain criteria in order to be eligible to receive securities registered on a Form S-8. This excerpt from p. 39 of the Handbook provides the details:
"Corp Fin interpretations make a distinction between traditional consultants—who are providing specific and limited services—and “quasi-employees,” who are providing services in something more akin to a traditional employment arrangement. This kind of “de-facto” employment relationship may exist where a non-employee provides the company with bona fide services that traditionally are performed by an employee, and the compensation paid by the company for those services is the primary source of the person’s earned income. For example, a doctor providing medical services to an HMO would likely be deemed a quasi-employee, while a doctor providing advice to a biotechnology company on the development of a new product would likely deemed a consultant.
Quasi-employees are not eligible for Form S-8 unless they receive at least 50% of their income in a calendar year from the issuer. For example, insurance agents who are exclusive agents of the issuer, its subsidiaries or parents, or who derive more than 50% of their income in a calendar year from those sources, would be eligible."
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 3/2/2021
RE: Here is John's response that he posted in TheCorporateCounsel.net Q&A forum:
Having the company pick up the cost of an HSR filing that's a personal obligation looks a lot like a perk to me for purposes of Item 402 of S-K, so I'd be hard pressed to conclude that the NYSE would say it's not comp.
-Lynn Jokela, CompensationStandards.com 2/25/2021
RE: I think you're correct - annual incentives paid under the circumstances you describe above should be reported under the bonus column. See the discussion beginning on p. 50 of Chapter 6 of the Executive Compensation Disclosure Treatise.
I suppose such treatment might be appropriate in the case of companies that implemented a short term incentive plan in response to the pandemic and provided performance targets that were lower than those established in the pre-existing plan. (Question 119.02 says that length of the performance period isn't relevant so that a plan serving as an incentive for a period less than a year would be considered an incentive plan).
But I also think there are probably a number of companies that are simply marking up last year's proxy and assuming that an award under their incentive plan should be reported in the same place as it was last year, even if discretion was exercised.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 2/19/2021
RE: I think it would be reasonable to classify this as a perquisite or other personal benefit, which means that it would be reportable in the SCT if the aggregate value of all perks is equal to or greater than $10,000.
In our Executive Compensation Disclosure Treatise, see the discussion on page 83 of the "Summary Compensation Table" Chapter about reporting compensation in the category that's the "best fit" - as well as the discussion beginning on page 136 about gift cards and the sample disclosure on page 145 that includes disclosure about a gift in the footnote to the SCT. Also see our "Perks" Chapter.
Of course, when you're determining which category of compensation is the "best fit," you shouldn't do so in a way that requires mental gymnastics in order to conclude that disclosure isn't required. There needs to be a reasoned analysis backing the disclosure decision.
-Liz Dunshee, Managing Editor, CompensationStandards.com 2/7/2021
RE: If the individual was not serving as an executive officer at any time during the 2020 fiscal year, I don't believe it would appropriate to characterize him as an NEO. The "up to two additional persons" disclosure requirement was added in 1993 in order to avoid situations where it might be possible to avoid compensation table disclosure of severance arrangements entered into with executives who left their positions before year end. Here's an excerpt from the adopting release (Release No. 33-7032):
“Item 402(a)(3) previously required compensation disclosure of the CEO and each of the four most highly paid executive officers (whose compensation exceeded $100,000) employed at fiscal year-end. Finding that these requirements provided an incomplete picture of the registrant’s compensation package when highly paid executives departed prior to fiscal year end, the Commission proposed to amend the rule to apply as well to any person who served as CEO during the latest fiscal year and any other executive officer who departed during such year but whose reportable salary and bonus would place them in the group of four highest paid executive officers.”
The adopting release for the 2006 amendments (Release No. 33-8732A) also supports the position that this was the rule’s intent:
“In addition, as was the case prior to these amendments, up to two additional individuals for whom disclosure would have been required but for the fact that they were no longer serving as executive officers at the end of the last completed fiscal year shall be included.”
I've not seen any guidance to suggest that Item 402(a)(3)(iv) would require disclosure of persons who did not serve in an executive officer capacity at any time during the most recent fiscal year.
See the discussion on pages 21-25 of Chapter 3 of the Executive Compensation Disclosure Treatise.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 1/10/2021
RE: I haven't seen any guidance on this topic, but my sense is that the EGC status and SRC status are separate and independent determinations. Since that's the case, I would argue that if you were an SRC prior to the Q2 2020 determination date, you could rely upon the rules that apply to companies transitioning from that status, even if you also lost EGC status at the same time.
Refer to our Smaller Reporting Companies - Exiting Status Checklist for other issues to consider.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 1/4/2021
RE: In a telephone call, the SEC staff confirmed your answer, John. Thank you.
-1/7/2021
RE: Even a blind squirrel finds an acorn every now and again! Thanks for letting us know.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 1/7/2021
RE: Would Form S-8 prevent this or is this okay under General Instruction A.1(a)(3)? I know it's not okay under General Instruction A.1(a)(5) but this is different.
-12/29/2020
RE: I think the first issue is whether the plan permits such a transfer. Many don't permit award transfers prior to settlement. In terms of the use of S-8 to cover shares to be awarded to a charity upon settlement of an RSU, I don't think that's permitted unless the charity in question can be squeezed into General Instruction 1(a)(5)'s definition of a "family member." The charity is not an eligible recipient for purposes of Form S-8. I think it's important to keep in mind that the SEC definitively rejected a proposal to allow charities to be transferred options registered on Form S-8 when it adopted changes that permitted transfers to family members. Here's an excerpt from the relevant release:
"Although an option exercise by a Section 501(c)(3) charity, for example, may not abuse Form S-8 for capital-raising purposes, the charity is not likely to have a pre-existing relationship with the issuer that would justify use of the abbreviated Form S-8 disclosure. While we seek to facilitate employees’ estate planning through the amendments we adopt today, we must keep in mind that investor protection is our primary objective. To permit entities that are not controlled by, or for the primary benefit of, an employee’s family members to exercise options on Form S-8 would suggest that the abbreviated Form S-8 disclosure is adequate for the offer and sale of securities to non-employees generally. As discussed above, we remain firmly persuaded of the contrary view."
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/29/2020
RE: I wonder if the Staff would make a distinction from the quote in the release in this instance where the director is dead and his benefits, including shares that are issued to settle a stock unit award, are being issued to a charitable organization as opposed to an exercise of an option during the lifetime of the director, the latter being the subject of the quote and involving an investment decision. A distinction is that here the director is dead and there is no subsequent investment decision being made by the charity. I have a call into the SEC Staff on this, but thought others may know the answer since I have to believe it's been asked before.
-12/29/2020
RE: Based on a conversation with the SEC Staff, the designation of a charitable organization as a beneficiary in this instance is okay and covered under the first sentence of General Instruction A.1(a)(3). While the second sentence to that instruction (as well as the language in the Form S-8 release quoted above) confuses the matter, this situation is such that it is okay because this isn't the type of situation that abuses Form S-8 per the SEC Staff. Hopefully this will be documented in a written interp or other writing at some point so it is clear for folks.
-12/29/2020
RE: Very helpful. Thanks for letting us know!
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/29/2020
RE: See the discussion on pages 36-38 of Chapter 11 of the Executive Compensation Disclosure Treatise regarding the treatment of equity received in lieu of retainer & meeting fees. That discussion addresses both equity that is received in lieu of fees without a vesting requirement and equity that is subject to a vesting requirement, and concludes that:
1. The fees forgone at the election of the director are to be disclosed in the “Fees Earned or
Paid in Cash” column of the table;
2. The receipt of the non-cash compensation is to be disclosed in a footnote to this column;
and
3. The actual number of shares (stock or options) received in lieu of the fees is to be reported
as part of the aggregate number of stock awards and the aggregate number of option
awards outstanding at fiscal year-end, as required by the Instruction to Item 402(k)(2)(iii)
and (iv) to the extent that the stock award is unvested and the option award is unexercised.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/28/2020
RE: See the discussion on valuation of perks beginning on p. 21 of Chapter 7 of the Executive Compensation Disclosure Treatise. The SEC's position is that aggregate incremental cost is the only basis for reporting perk values. If a particular perk does not involve any aggregate incremental cost to the company, then to the extent that the minimum disclosure threshold is triggered for an NEO, the item should be described in the footnote to the “All Other Compensation” column of the Summary Compensation Table, but with no dollar value added.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/28/2020
RE: General Instruction A.1(a)(3) to Form S-8 provides that the term employee also includes "former employees," but only to permit registration on Form S-8 of (i) the exercise of employee benefit plan stock options and the subsequent sale of the securities, if such exercises and sales are permitted by the plan, and (ii) the acquisition of shares pursuant to intra-plan transfers among plan funds, if permitted by the plan. The stock contribution in the facts presented does not fit into either of one of these fairly narrow applications. However, the purpose of the S-8 is to register shares issued pursuant to employee benefit plans.
Presumably, the SEC Staff extended the application of the Form S-8 to stock option exercises by former employees because the grantee was granted the option while employed by the issuer by reason of he or she being employed by the issuer, and so, notwithstanding the nature of the option that permits post-termination exercises, it is nonetheless covered by the S-8. Similarly, under the facts presented, the former employee earned a "right" to the stock while employed by the issuer by reason of he or she being employed by the issuer - both by being a participant in the employee benefit plan and remaining employed by the issuer on the match determination date. Accordingly, it seems reasonable to me to take the position that the S-8 should cover the stock issued, despite the fact that the administrative delay in actually crediting the stock happens to fall at a time when the employee is no longer employed by the issuer.
-11/15/2013
RE: Does the same reasoning provided above apply to issuances to former directors of shares previously credited to a stock unit account under a deferred compensation plan?
-12/27/2020
RE: I think that it likely would. Instruction 1(a)(1) defines the term "employee" to include any director, so I don't think there's a basis to differentiate between the treatment accorded to former employees and former directors in this situation.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/28/2020
RE: I haven't seen this addressed anywhere, but my assumption is that the answer depends on whether the paid interns are regarded as employees under applicable labor laws. See the Orrick blog & DOL guidance.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/18/2020
RE: I think you can make that argument, although I'm not sure how receptive the Staff will ultimately be to it. The tough thing about this argument is that you're trying to fight your way out of a pretty clearly delineated box. As you note, payment of commuting expenses is one of the categories that the SEC has specifically referenced as being a perk. So, all of your eggs are in the pandemic basket, and your argument is essentially that in 2020's new normal, where work from home is requirement, the fact that the destination is nominally a HQ facility should not result in occasional travel to that facility being regarded differently from any other type of business travel.
In other words, under pandemic operating conditions, travel to the HQ should not be regarded as commuting, because it is not the place where the executive customarily performs his or her services. Conceptually, I don't think that's a bad argument. In fact, if you look at the discussion of business travel v. commuting expense that begins on p. 58 of Chapter 7 of the Executive Compensation Disclosure Treatise, you'll note that the authors indicate that a test for commuting expenses based on whether the executive “mainly works” at the place to which she is traveling is potentially supportable. The authors go on to caution, however, that "not everyone signs on to the notion that travel is a perk if (and only if) the travel is to the executive’s “main” place of work."
Since you're basically making a "main place of work" argument, I think your position would be strengthened if you could demonstrate that the company's pandemic protocols mandated that all HQ personnel who could work from home should work from home, that overall HQ operations were far from business as usual, and that the executive did not have an option to work at the HQ facility absent a compelling business need for his or her presence there.
It also would be helpful if this work from home requirement continued for an extended period, and did not, for example, end when the first round of mandatory lockdowns ended in late spring. I think you would also be helped with your argument if you could demonstrate that travel to the HQ facility by the company's executives was infrequent and that there were unique circumstances in each instance that required the executive to travel to the facility, notwithstanding an otherwise applicable work from home policy.
-John Jenkins, Editor, CompensationStandards.com, CCRCorp 12/16/2020
RE: In the first scenario, I think I'm more comfortable with the conclusion that the director fees paid by Company B would not be included in Company A's director comp disclosures than I am with the conclusion that Company A would not be required to disclose the fees as a related party transaction. However, I note that you refer to the 30% interest as a "joint venture" in your caption, and so it is possible that payments from the JV entity to the directors could be regarded as director fees subject to disclosure under the "All Other Compensation" column under Item 402(k)(2)(7)(F).
The concept of "participation" is very broad under Item 404, and I think you'd need to inquire much more deeply into how those individuals became directors of Company B and what their role is on the board. For example, if they are serving as director designees of Company A, then their service and compensation is indirectly at the behest of Company A, and it isn't too much of a stretch to conclude that Company A is participating in the arrangement. Here's an excerpt from p. 18 of our Related Party Transactions Disclosure Handbook on the "participant" concept:
"Being a participant encompasses situations where the company benefits from a transaction but is not technically a contractual party to the transaction. In response to concerns that the concept of a “participant” might be too broad and far-reaching, the SEC offered the following example of a case where disclosure might be required even if the company is not a contractual party: “[d]isclosure would be required if a company benefits from a transaction with a related person that the company has arranged and in which it participates, notwithstanding the fact that it is not a party to the contract.” See the 2006 Adopting Release at footnote 418."
In the second scenario, I think additional fees payable by Company A to its directors for service as its representatives on Company B's board would be disclosable under Item 402. The best place for that disclosure seems to me to be in the "All Other Compensation" column. Whether a situation in which the Company A director serves without additional compensation as a Company B director, but Company B pays a management involves a related party transaction under Item 404 seems to me to depend on whether the directors may be regarded as having a "material interest" in the transaction. I think that's less likely if they aren't being compensated for their service and don't have an equity interest in Company B, but unfortunately, the guidance here is very murky, so I would take a hard look at the relationship before concluding that a material relationship doesn't exist. See the discussion on pgs. 26-28 of the Handbook.
-John Jenkins, Editor, CCRCorp 12/7/2020
RE: Thanks so much for your feedback, and agree a close look is needed
-12/10/2020
RE: Not unless the CEO, CFO or an NEO is a member of that committee. Item 5.02(e) isn't triggered by a decision to pay compensation to non-employee directors. If you elected a new director other than at a shareholders' meeting and designated that individual to serve on the special committee, then the compensation arrangements for that person would need to be disclosed under Item 5.02(d).
-John Jenkins, Editor, CCRCorp 12/9/2020
RE: In looking further, it appears that, without necessarily expressly saying so in the 402 disclosure in the proxy/10-K, issuers may be relying upon provisions in umbrella long-term incentive plans that authorize cash awards to justify omitting 8-K disclosure on the basis that the authority to grant such awards is provided in the plan and the 402 disclosure provides the necessary details regarding the terms on which such bonuses were determined. Is that a reasonable approach?
-12/3/2020
RE: In the case of previously disclosed plans, I think that's a fairly common approach if the awards are "materially consistent" with the terms of the plan. See the discussion beginning on p. 37 of Chapter 17 of the Executive Compensation Disclosure Treatise for a more detailed analysis.
-John Jenkins, Editor, CompensationStandards.com12/3/2020
RE: If only board approval is required, then the date that the board adopts the plan is the triggering date for an 8-K. Instruction 2 to Item 601(b)(10) generally provides that a company need only file copies of the various compensatory plans and need not file each individual director's or executive officer's agreement "unless there are particular provisions in such personal agreements whose disclosure in an exhibit is necessary to an investor's understanding of that individual's compensation under the plan."
Assuming all of the other terms are the same, I don't think the fact that the level of benefits provided under the plan will differ among the various executives would preclude you from relying on this instruction and filing a "form of" agreement.
-John Jenkins, Editor, CCRCorp.com 11/10/2020
RE: I've heard of some companies using a general guideline — e.g., not more than 25% of vested holdings — but I don't think it's common to have a hard and fast rule. The issue that you run into with having a guideline is that people will then feel it's acceptable to regularly sell up to whatever maximum you've set. You'll also be faced with having to oversee compliance and respond to the inevitable requests for exceptions. Sometimes there are valid reasons for large sales, like the executive is buying a house, but you don't necessarily want to be the arbiter of that. Most companies, even those who have some sort of guideline in place, emphasize that the size of the sale is ultimately the executive's decision, but there are negative market perceptions of large sales and they trust the executives will act with that in mind.
-Lynn Jokela, Associate Editor, CompensationStandards.com 10/30/2020
RE: I agree that 3% - 5% is the reasonably customary range for the number of shares to reserve.
One source of the data you are looking for is the Riskmetrics (ISS) annual stock plan dilution survey. The survey is available for purchase in the ISS Governance Bookstore. The 2008 survey has not yet been published, so the latest data is for companies with fiscal year-ends between April 1, 2005 and March 31, 2006, and that filed their proxy statements with the SEC on or before July 31, 2006. The average potential dilution from share reserve proposals in that period was 4.3% of shares outstanding.
-Dave Lynn, Editor, CompensationStandards.com 3/19/2008
RE: Any updated benchmarks on this topic? Thanks.
-10/8/2020
RE: I think all questions relating to equity plan design have only gotten more complicated than they were when Dave first responded to this question (which predated ISS's implementation of its EPSC). That being said, I think Dave's numbers from 2008 are likely still in the ballpark, given ISS's burn rate tables and some recent data from Compensia on share reserves at tech companies.
-John Jenkins, Editor, CompensationStandards.com, CCRcorp. 10/8/2020
RE: This isn't an issue that's received a lot of attention, probably because truly costless perks are pretty rare, aside from the items you mentioned. You might find the discussion in Topics #1261 and #774 helpful.
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 9/29/2020
RE: Thanks, John, for the helpful reply. I hope that you and your family are doing well. I agree that it is an unusual question that will be highly dependent on the facts and circumstances of each perk.
-9/29/2020
RE: I also checked in with Mark Borges for his thoughts on this question, and here's what he had to say: In my experience, the common situation is spousal/family travel on company aircraft with an executive where there is no incremental cost associated with their presence. As you’ve noted, other common examples include free tickets at events where the company is already a sponsor and the sponsorship is accompanied by a specified number of tickets to the event that are then distributed to executives so that the tickets get used. It may also include use of company products where there is no additional cost associated with letting the executive use the product (like a laptop or a phone) to "try it out" since it represents excess inventory.
I checked through my records on perquisites and came up with the following additional fact patterns that may fall into the "costless" category:
1. Initial club membership initiation fee that the Company paid years ago, but is offering to transfer membership to an executive who is willing to pay the ongoing membership dues on an individual basis. I believe that some of us thought back in 2018 that the sunk cost of the original initiation fee could be disclosable as a perquisite in the year of the membership transfer, but probably wouldn’t continue to disclose going forward.
2. Company pays expenses for executive and spouse to attend company-sponsored awards program, but entire expenses for program are reimbursed to the company by a vendor, so company ultimately doesn't incur any aggregate incremental cost for the trip.
3. Executive makes personal use of corporate aircraft, but only reimburses aggregate incremental cost, not the full cost (which, presumably, would include some portion of the fixed costs of the flight).
Granted, these are all highly unusual fact patterns, which leads me to believe that costless perquisite situations don't come up all that often.
-Liz Dunshee, Managing Editor, CompensationStandards.com 9/29/2020
RE: My sincere thanks, Liz and Mark. I appreciate the extra effort and hope that you and your families are safe and sound.
-9/29/2020
RE: Yes. Section 954 of the Dodd-Frank Act requires the SEC to implement rules requiring a new listing standard, which requires listed companies to adopt clawback policies for current and former executive officers. Section 954 contemplates that an issuer would be required to clawback excess incentive-based compensation paid to an executive during the 3-year period preceding the date on which the issuer is required to prepare an accounting restatement. Unlike the provisions of Sarbanes-Oxley on clawbacks, Dodd Frank doesn't require the restatement to result from misconduct.
The SEC proposed rules to implement Section 954 back in 2015. Those rules have not yet been adopted, and as Mike Melbinger blogged earlier this year, it looks like the SEC may issue further proposed regulations later this year.
-John Jenkins, Editor, CompensationStandards.com, CCRcorp. 9/21/2020
RE: Mark Borges notes: Reading through Item 402(d), which talks in terms of "each grant" of an award to a named executive officer that has been made during the fiscal year, I would think that you should consider disclosing both plans in the Grants of Plan-Based Awards Table.
In terms of what you should say about the original bonus program, I would recommend including identifying the plan (which might require adding a separate column after column (a) and before column (b) to identify each plan), then adding in the estimated possible payouts under the original plan (in the appropriate columns) with a footnote indicating that the plan was replaced by a new plan mid-year as a result of the COVID-19 pandemic.
To me, the amount of detail that you go into on the original plan is somewhat dependent on what you say about the original plan in the Compensation Discussion and Analysis. My instinct is to put most of the detail in the CD&A and provide a cross-reference in the footnote to the Grants of Plan-Based Awards Table.
-Liz Dunshee, Managing Editor, CompensationStandards.com 8/26/2020
RE: Recent data shows that 69% of Fortune 100 companies now expressly assign board or comp committee oversight for human capital. That’s up from 28% in 2017. I think we are reaching a tipping point and that investors and companies are recognizing it’s a very important issue that would benefit from express board oversight. Sometimes a different committee has responsibility, but it's typically the compensation committee. I recently blogged about this on our "Advisors' Blog."
We also have a panel about the Comp Committee’s role in HCM at our "Proxy Disclosure & Executive Pay Conferences" next month, featuring Keir Gumbs of Uber, Blair Jones of Semler Brossy and Maj Vaseghi of Freshfields. You'll be able to get the latest info from these experts if you register!
-Liz Dunshee, Managing Editor, CompensationStandards.com 8/15/2020
RE: It's an indeterminate number and per Rule 416(c), that's what people register. Here's what Rule 416(c) says:
"(c) Where a registration statement on Form S-8 relates to securities to be offered pursuant to an employee benefit plan, including interests in such plan that constitute separate securities required to be registered under the Act, such registration statement shall be deemed to register an indeterminate amount of such plan interests."
-John Jenkins, Editor, CompensationStandards.com, CCRcorp 7/7/2020
RE: Although it doesn't call out emerging growth companies specifically, Question 119.01 of the Staff's Reg S-K CDIs says that when an executive officer becomes an NEO for the first time, the Summary Compensation Table needs to include only the exec's pay for the last completed fiscal year — and not their pay for the two preceding fiscal years. So your approach seems reasonable in light of that interpretation.
Note that CDI 119.18 says that pay data is required for all three years for people who are moving in and out of NEO status.
-Liz Dunshee, Editor, CompensationStandards.com 7/1/2020
RE: The conservative answer is to file the undertaking, but I don't think a lot of companies do. I think that many companies with publicly filed indemnity agreements often view the undertaking as nothing more than a required delivery, rather than a separate material contract, particularly since its required terms are usually laid out in the contract.
A lot of companies that don't have indemnity agreements have mandatory advancement baked into their bylaws, and those publicly filed bylaws often lay out the required undertaking language as well. In these situations, I think some companies simply conclude that the undertaking is just a procedural formality to permit the exercise of a right that the officer has under the bylaw.
-John Jenkins, Editor, CompensationStandards.com, CCRcorp. 6/25/2020
RE: If the committee needs independent legal counsel, then it should decide who that counsel is, and that counsel should report directly to the committee. I think many comp committees don't routinely retain separate counsel, and often work with the company's existing internal and outside counsel on the legal aspects of executive compensation plans and arrangements.
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 6/15/2020
RE: As you point out, there are some obvious limitations to simply using a cross-reference to the financial statement footnotes. In fact, Mark Borges asked David Lynn about this during our teleconference in January:
BORGES: David, just to be clear. If you have four awards reflected in your Stock Awards column, your footnote would then either have to disclose the assumptions that went into the valuation of each of those awards or a cross reference to the financial statements for the specific year in which those awards were made which would have that information?
LYNN: Yes, it should provide sufficient information so that someone could understand with respect to all those awards that are reflected in the table. And whether that's in the footnote for the current year or you have to put into the disclosure itself, you could satisfy it either way.
BORGES: Yes, the way the Instruction to Item 402(c)is drafted, it seems to assume that you would always cross reference to where the information is located, but it sounds like you're saying you could put actually include the information in the footnote if you wanted rather than include it by cross reference.
LYNN: Yes, the whole purpose of the cross reference is to streamline it since you're talking about much the same information in all of those places.
BORGES: One last point on the footnotes. My experience is that the assumption information that you typically find in the financial statements or in the financial statement footnotes reflects the weighted-average assumptions that were used across the entire employee population that received awards for that year.
To the extent that you treat your executive officers as a separate homogeneous group for purposes of determining the valuation assumptions, primarily because the expected term assumption for your executives is often different than what it may be for rank and file employees, would it still be permissible, where you have used different assumptions for the executives, to cross reference your financial statements? Or, would you, in fact, have to provide the specific assumptions that were used for the executive in a footnote to the column?
LYNN: Yes, probably the best disclosure route, although I don't believe that it's necessarily required, is in the footnote to the financial statements you might also have that information.
Clearly that information may be particularly relevant when you're looking at the Summary Comp Table disclosure because there you are dealing with the individual executives that are subject to a different assumption for purposes of determining a grant date fair value.
-Broc Romanek, Editor, CompensationStandards.com 4/16/2007
RE: On a related note, is disclosure of assumptions required if the awards were so immaterial that disclosure of the assumptions was not required in the financial statements, notes, or MD&A? I note that Instruction 1 to Item 402(c)(2)(v) and (vi) only contemplates disclosure by cross-reference. Can it be taken to mean, then, that if the disclosure of assumptions was not required to be provided in the sections specified in the instruction, the instruction does not require the assumptions to be disclosed at all?
-4/26/2020
RE: I haven't seen anything on this and don't know if the Staff would find it persuasive, but I think it's a decent argument. When the SEC adopted the disclosure requirement, it chose to require disclosure about those assumptions to be made "by reference to a discussion of those assumptions in the registrant's financial statements, footnotes to the financial statements or discussion in the Management's Discussion and Analysis."
In drafting the rule, it would have been easy to adopt a standalone requirement, and permit it to be satisfied by incorporating other disclosures. The SEC didn't do that. It seems to me that this may be read to imply that the disclosure requirement is tied to the standards applicable to the disclosures required by GAAP or Item 303, and if the awards aren't material enough to trigger an obligation to disclose them in the financials or MD&A, then they shouldn't be required by Item 402(c)(v).
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 4/27/2020
RE: Here's how I understand the disclosure requirement. Assuming relevant thresholds are met, you would disclose the value of the incremental cost of the airplane use in the "All Other Compensation" column of the comp table if the executive did not reimburse the company for it.
If the executive did reimburse the company for the incremental cost, there would be no disclosure of the dollar amount in the comp table. However, the use of the airplane would still need to be described as a type of perk in the perk footnote. If the executive reimbursed the company for the total cost, no disclosure would be required, because it wouldn't be regarded as a perk.
As the Treatise discusses at length, the challenge is to come up with a reasonable methodology that sorts out what should be included in the calculation of "incremental costs," and different companies may come up with different answers to that question.
I can't address the second part of your question. I don't know what the FAA's policy is on reimbursement in the context of fractional ownership interests.
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 4/27/2020
RE: Thank you very much for the above, in addition to the extensive information in the Treatise.
-4/27/2020
RE: I'm not aware of any guidance addressing this, but it seems to me that an approach using the ASC 728 grant date would be the most appropriate one, since it is consistent with how the awards are reported in other parts of the proxy and/or 10-K. I would appropriately footnote the table.
-John Jenkins, Editor, CompensationStandards.com, CCRcorp 4/20/2020
RE: I realize this question has remained unanswered since January 2007; however, I am bumping this question on the off chance someone reads this now and decides to provide insight or guidance. Thanks in advance.
-4/1/2020
RE: In my limited experience, I have not seen deferred comp distributions to retiring directors disclosed in the director compensation table. Here's Sysco's 2019 proxy statement, which discloses a director deferred comp plan that pays out on retirement, along with disclosure that two directors listed in the comp table retired during the year. While there was disclosure about above-market earnings on the deferred comp for one of the retiring directors, there was no reference to a payment or an accrual under the plan.
-John Jenkins, Editor, CompensationStandards.com, CCR Corp. 4/1/2020
RE: For a deferred compensation plan with a cash-based, interest-only return, earnings aren't reportable as “above-market” unless the rate of interest exceeds 120% of the applicable federal long-term rate. See Instruction 2 to Item 402(c)(2)(viii). For more detail and Staff guidance, see Chapter 6 of The Executive Compensation Disclosure Treatise.
-John Jenkins, Editor, CompensationStandards.com 3/12/2020
RE: The one potential issue that I see with this is the need to file an Exhibit 5 opinion with the S-8. However, the Staff does generally accept Exhibit 5 opinions that assume shareholder approval of a required amendment to charter documents will be obtained. A clean opinion is required to be filed via post-effective amendment or Form 8-K. I assume the same principles would apply to a plan amendment, but have not seen anything directly addressing that. See Staff Legal Bulletin No. 19.
-John Jenkins, Editor, CompensationStandards.com 3/3/2020
RE: Thanks. We would typically phrase our opinion to read: " … the Shares have been duly authorized and, when the Shares are issued by the Company in accordance with the terms of the Plan and the instruments executed pursuant to the Plan which govern the awards to which any Share relates, the Shares will be validly issued, fully paid and non-assessable..." Before the plan is amended, the additional shares cannot be issued in accordance with the terms of the plan and thus the opinion regarding "validly issued, fully paid and non-assessable" would not need to be made subject to any additional express assumption. Once the plan is amended and the additional shares can be made the subject of awards (with any award agreements being made contingent on receipt of stockholder approval of the amendment), the opinion regarding "validly issued, fully paid and non-assessable" would apply to those additional shares. Do you see that distinction as creating an issue regarding the sufficiency of the Exhibit 5 opinion?
-3/3/2020
RE: In the highly unlikely event that this ever became an issue, I don't know how the Staff would interpret the use of the phrase "duly authorized" in the opinion in this particular context. Obviously, your intention is to simply address the corporate law issue of whether the shares have been duly authorized, but there may be some potential ambiguity in using that term in the context of an S-8 covering shares that need a plan amendment in order to be issued.
-John Jenkins, Editor, CompensationStandards.com 3/3/2020
RE: For what it's worth, one of the issues that I've seen companies grapple with is the possibility that whatever targets they set now, they may find themselves wanting to preserve the flexibility to adjust them in the future due to the uncertainties created by the outbreak. Adjusting targets is obviously something that many investors and proxy advisors are extremely skeptical about, but for many companies, there's legitimate concern that pegging targets now may turn out to be the equivalent of trying to catch a falling knife.
One of the things companies may want to consider is flagging the potential implications of the coronavirus on 2020 targets in their CD&A discussions of post-2019 compensation decisions, and providing some disclosure about the possibility of further adjustments, if that's something the comp committee wants to be able to consider.
-John Jenkins, Editor, CompensationStandards.com 2/28/2020
RE: I don't think blanket delegation of authority to the CEO to set the compensation of other executive officers can be reconciled with the requirements of Rule 5605(d)(2). While the CEO can certainly make recommendations to the Committee regarding the appropriate compensation levels of the other executives, I think that the actual compensation "must be determined, or recommended to the board for determination" by the Comp Committee.
The CEO's role in setting comp for other executive officers should be laid out in the Comp Committee's charter. Here's an example from McKesson's charter that contemplates an active role for the CEO in the compensation process:
"For all executive officers other than the CEO, the Committee, in consultation with the CEO, will annually review and approve the corporate goals and objectives relevant to executive officers’ compensation. In light of these goals and objectives, the Committee, in consultation with the CEO, will determine (i) the salary paid to executive officers, (ii) the grant of cash-based bonuses and equity compensation provided to executive officers, (iii) the entering into or amendment or extension of any employment contract or similar arrangement with executive officers, (iv) executive officers’ severance or change in control arrangement, (v) material perquisites provided to executive officers and (vi) any other executive officer compensation matter that may arise from time to time as directed by the Board. In determining the long-term incentive component of executive officers’ compensation, the Committee will consider the same factors pertaining to such compensation that it considers for that element of the CEO’s compensation."
-John Jenkins, Editor, CompensationStandards.com 2/11/2020
RE: Check out Coca-Cola, which changed its median employee due to significant changes in its employee population due to dispositions and acquisitions:
-John Jenkins, Editor, CompensationStandards.com 2/4/2020
RE: Thanks very much for the extremely quick and helpful reply. Great service, as usual.
-2/4/2020
RE: You're welcome!
-John Jenkins, Editor, CompensationStandards.com 2/4/2020
RE: No, I don't think so. In fact, I've seen some ridiculously small gift cards reported in summary comp tables.
One for Moderna includes $200 gift cards given to its NEOs and even breaks them out separately in a footnote.
Nike doesn't break out the dollar value, but it also calls out "nominal" gift cards in the footnotes to its summary comp table.
Overstock not only put $250 gift cards in its summary comp table, it discussed them in its CD&A!
-John Jenkins, Editor, CompensationStandards.com 2/4/2020
RE: It's difficult to answer questions about CD&A disclosure in the abstract, because they are invariably highly fact-specific. However, Item 402(b) requires the CD&A to address all material elements of the registrant's compensation of its NEOs. Item 402(b)(2) lists information that may be material, and included in that list are "the factors considered in decisions to increase or decrease compensation materially." If the changes in base salary are material, I think this line item indicates that the reasons for decisions about those changes need to be addressed, and would expect that this discussion would likely need to address reasons why certain officers received adjustments when others did not.
-John Jenkins, Editor, CompensationStandards.com 1/15/2020
RE: I ran this one by Mike Melbinger, our resident 162(m) expert. He says there's no reason that a compensation committee member must qualify as an outside director.
-Liz Dunshee, Editor, CompensationStandards.com 1/13/2020
RE: Yes, they would be disclosed in the year they were awarded, even if they haven't vested. The vesting arrangements would be taken into account in determining the grant date fair value under ASC 718. Under Item 402(u)(2)(i), the “total compensation” for the CEO used in the pay ratio calculation is generally required to be determined in the same manner used as the Summary Compensation Table (under Item 402(c)(2)(x)).
-John Jenkins, Editor, CompensationStandards.com 1/8/2020
RE: I haven't seen anything from the Staff interpreting the scope of Note A, but my sense is that it shouldn't be read that broadly - and the merger proxies that I've seen routinely include the advisory say-on-parachute vote without including Item 402 comp data. Even if Note A could be read to require Item 8 disclosure, your transaction does not contemplate the election of directors, which is required to trigger a say-on-pay vote under Rule 14a-21.
-John Jenkins, Editor, CompensationStandards.com 1/1/2020
RE: Thank you, John! Much appreciated.
-1/1/2020
RE: I think there's a good argument that if you're making a substantive change to a CIC provision, this is the kind of material amendment that would trigger an 8-K obligation under Item 5.02(e).
-John Jenkins, Editor, CompensationStandards.com
RE: Thanks John, really appreciate it.
-12/13/2019
RE: Levi-Strauss comes to mind, as does PPG. Mark Borges blogged about both companies' comp disclosures and you should check out some of the other companies that he highlighted in his blog.
-John Jenkins, Editor, CompensationStandards.com 8/6/2019
RE: Thanks very much for the quick reply. Will definitely do so. Much appreciated, as always.
-8/6/2019
RE: Kudos to planning in advance and thinking this way. I think that a good, compliant CD&A should be able to be drafted in about 10 to 12 pages. Instead of long, narrative paragraphs and generic, multiple-year boilerplate, why can't nearly all of the material information be provided in basic bullet points or charts/tables?
The "what" could be provided very concisely in charts/tables (think salary, bonus and LTI information), and the "why" could be provided in brief bullet points. I also think the other standard narratives (i.e., philosophy, objectives, management/consultant involvement, elements of pay, pay mix, impact of SOP vote, etc., etc.) could be provided in bullet points, or a chart, or other graphic elements.
I think the real issue is that moving from what most companies produce now to a disclosure like that (really short, sweet) would be out of the ordinary and groundbreaking. And who is willing to be the first to try this really short, concise approach (i.e., risk of SEC comments, risk of plaintiff litigation, etc.)?
-9/12/2019
RE: Thanks very much for response. I think that it would be helpful if the SEC mimicked a high school English teacher, as in, "Please write an essay no longer than 2,500 words explaining to shareholders how your executive compensation program works, why your named executive officers received the compensation they did for the performance year, and how that compensation reflects your pay for performance philosophy." Let's be honest- virtually no one reads a CD&A, even if they claim to do so (cf. Finnegan's Wake). Certainly an institutional investor voting 4,000 positions on say on pay is not, your Uncle Joe is not, and the proxy advisory firms, if they read a CD&A at all, only extract certain information necessary to complement their quantitative screens. Because of the involvement of lawyers, compensation consultants, HR personnel, corporate governance experts, and endless "best practices" suggestions, the typical CD&A has become a bloated document that brings to mind the description of a camel as a horse designed by a committee. Not that I mind having a job.
-9/12/2019
RE: Maybe some people are taking your advice. Equilar just published a study showing that the average CD&A word count dropped for the first time in 5 years. Looks like companies may be relying more on graphs of alternative pay calculations to tell their stories:
- 75.8.% of Equilar 100 companies used a proxy summary in the annual proxy in 2018
- The word count of Equilar 100 companies’ CD&A portion saw a decline for the first time in five years, dropping to an average of 9,359 words in 2018
- The number of companies that included a pay mix graph fell six percentage points from 2017 to 2018, down to 78.8% of companies
- After hovering around 77.0-79.0%, the number of companies that included a compensation program checklist decreased by 3.3 percentage points from 2017 to 2018, down to 74.5%
- In 2018, 46.5% of Equilar 100 companies included a graph displaying an alternative pay calculation different from those displayed in the summary compensation table, such as realized or realizable pay
-Liz Dunshee, Editor, CompensationStandards.com 12/5/2019
RE: Thanks, Liz. Are you aware of any CD&A that includes a Q&A section? It seems that approach would be a good way to concisely convey the information of most interest to the proxy advisory firms and major shareholders. This is especially true when an issuer is trying to summarize the shareholder feedback received during engagement calls, how the comp committee responded to it, and where more detailed disclosure can be found.
Best wishes for a very happy 2020.
-12/30/2019
RE: I haven't seen that format specifically, but it does strike me as more user-friendly than a long narrative, and maybe some of our other members will chime in with their experiences.
DFin's annual "Guide to Effective Proxies" also gives many examples of CD&A TOC layouts and executive summaries that are often used to highlight this type of info. Although, here's what Dave Lynn had to say about CD&A summaries in the latest edition of our print newsletter, "The Corporate Executive"
Is a Summary of the Summary Really Necessary?
While proxy statement summaries have become a fixture of the modern-day proxy statement, one continuing area of debate is whether a company needs to include a summary of CD&A in the proxy statement as well. CD&A summaries could be the product of too much CD&A in general, and issuers that employ a CD&A summary should consider whether they could achieve the same objective by just making CD&A shorter and more effective.
A CD&A summary seems like such an anathema because the CD&A disclosure itself was intended to be a summary discussion. When adopting the CD&A requirement, it is unlikely that the SEC anticipated the ten thousand word behemoth that CD&A has become. We believe that a more focused discussion and analysis, when combined with appropriate graphs and charts that demonstrate key principles, would likely obviate the need for a separate CD&A summary that is intended to highlight only the most salient points.
-Liz Dunshee, Editor, CompensationStandards.com 12/30/2019
RE: Thanks again, Liz. I completely agree with David on the dubious benefits of a CD&A "summary", which often turns into a five-page drafting exercise that repeats information found in the CD&A. My point with the Q&A suggestion was that it could replace much denser and difficult to find information on one page right up front. The Baltimore Catechism always worked for me.
-12/30/2019
RE: Yes, I share your view that a Q&A done right would be much easier to navigate than a summary - just haven't seen that highlighted as a trend (yet). I will let you know if I come across any companies who are doing it...
-Liz Dunshee, Editor, CompensationStandards.com 12/30/2019
RE: CVS Health used a Q&A format as part of its 2017 CD&A summary. It got some love from the proxy design gurus, but the company seems to have gone back to a more traditional format in more recent proxies.
-John Jenkins, Editor, CompensationStandards.com 1/1/2020
RE: Thanks very much, John. I checked out the CVS CD&A and it's extremely helpful. Best wishes for a very happy new year to you, Liz, and your colleagues.
1/2/2020
RE: Yes, I believe that's correct. You should consider the possible need to disclose this executive's compensation in response to Item 404(a) unless the conditions set forth in Instruction 5 to Item 404(a) have been satisfied. See the discussion on pages 62-63 of our "Related Party Transactions Disclosure Handbook"
-John Jenkins, Editor, CompensationStandards.com, 10/16/2019
RE: Levi-Strauss comes to mind, as does PPG. Mark Borges blogged about both companies' comp disclosures and you should check out some of the other companies that he highlighted in his blog.
-John Jenkins, CompensationStandards.com 8/6/2019
RE: Negative. Mark Borges hasn't seen any yet that have disclosed an existing conflict and how it is being handled.
-Broc Romanek, Editor, CompensationStandards.com 1/8/2013
RE: To be clear, there have been companies that disclose that the Company uses the consultant's firm for other purposes and pays $___ in fees, but these disclosures than conclude - usually after adding reference to the consulting firm's internal policies re conflict - that this is acceptable. They don't say this a conflict but they don't say there isn't one (well, sometimes they say "we are satisfied that . . . "). They just disclose these facts.
- Broc Romanek, Editor, CompensationStandards.com 1/9/2013
RE: And don't forget this ongoing survey I am conducting on this topic: http://www.thecorporatecounsel.net/survey/viewresults.asp?SurveyNo=187
-Broc Romanek, Editor, CompensationStandards.com 1/9/2013
RE: I have seen many disclosures where affiliates of the compensation consultant provide other services to the company, but I don't recall whether I have seen disclosures where the compensation consultant itself is providing other non-executive compensation related services to the company. I assume that if such services were provided, best practice would be to make disclosure under Item 407(e)(3)(iv), and indicating that the Committee got comfortable that there wasn't a conflict of interest. Would best practice also lean towards not using the compensation consultant to provide compensation services unrelated to executive and non-executive director compensation matters? It's not clear to me that any such services could be provided without there being some conflict of interest.
- 6/25/2019
RE: It’s still pretty rare for companies to recover previously paid awards under a clawback policy, but when Wells Fargo reduced award payouts, etc., the company discussed it in the CD&A. See pg. 54 of its 2017 proxy statement, pg. 71 of its 2018 proxy statement and pg. 98 of its 2019 proxy statement. Also see the discussion on pg. 107 of the “CD&A” chapter of Lynn, Borges & Romanek's "Executive Compensation Disclosure Treatise.” I don’t think this would have an impact on any of the tables other than potentially “Outstanding Equity Awards at Fiscal Year End.” See pg. 99-100 of the “Summary Compensation Table” chapter and pg. 56 and elsewhere in the “Equity Tables” chapter.
As far as awards that haven’t vested or been paid, if the awards would otherwise appear in the tables then Reg S-K CDI 117.04 indicates that you should still report them there – with a footnote that the award was forfeited (also see CDI 119.25 for non-equity awards). Again, though, it wouldn’t appear in the “Outstanding Equity” table since that’s reporting as of a specific date and presumably the award is no longer outstanding at that time. See pg. 56 of our “Equity Tables” chapter. And it also would be appropriate to discuss in the CD&A.
Here’s a link to the online version of our Disclosure Treatise with all the chapters noted above: https://www.compensationstandards.com/CD/
-Liz Dunshee, Editor, CompensationStandards.com 6/19/2019
RE: Thanks as always for the advice. I recall that in February of this year Goldman took the unusual step of filing an 8-K disclosing some of the possible clawback actions its comp committee was considering in light of the Malaysian investment fund scandal.
-6/20/2019
RE: Interpreting the internal machinations of ISS isn’t an easy task. I think they try pretty hard to keep the Analytics arm separate from the proxy advisor services, and John also noted in his memo that his opinions don’t reflect an official ISS position or a preview of upcoming voting policies. So take that for what it’s worth.
But ISS has also been laying the groundwork for more reliance on “Economic Value Added” metrics, and at a high level, these points seem to be in line with its rationale for doing that. Here’s a blog I wrote a few months ago about their EVA analysis: https://www.compensationstandards.com/member/blogs/consultant/2019/03/eva-all-hype-no-nuance.html
-Liz Dunshee, Editor, CompensationStandards.com 6/19/2019
RE: Thanks, Liz. ISS's promotion of EVA as one of its quantitative pay-for-performance screens reminds me of one wag's definition of Philosophy: "The formulation of incomprehensible answers to unanswerable questions." In this case, the unanswerable question is: "How can a proxy advisory firm perform an analysis of CEO pay-for-performance alignment at several thousand public companies within the space of five months or so while ignoring the performance metrics and goals selected by the compensation committee, the individual performance of the CEO, or the company's business strategy or operational performance?" ISS's sudden enthusiasm for EVA may be attributable to its acquisition of a consulting firm that promotes best practices in EVA (whoever decides what those are). Given that very few compensation committees or consultants, if any, are designing incentive compensation plans using EVA as a metric for CEO pay decisions, it's hard to see how ISS's use of EVA will improve the quality of its pay for performance alignment methodology or say on pay voting recommendations. And what will come next after EVA?
-6/20/2019
RE: That's a longer & more complicated conversation than you might think. Check out the discussion beginning on page 50 of our "Form S-8 Handbook." https://www.thecorporatecounsel.net/GreatGovernance/member/handbook/S-8.pdf
-John Jenkins, Executive Press Inc 6/18/2019
RE: I was typing a response about how practice really varies - but John's cut to the chase. Also see the resources in our "Form S-8" Practice Area. https://www.compensationstandards.com/Member/Areas/FormS-8/
-Liz Dunshee, Editor, CompensationStandards.com 6/18/2019
RE: This was a fairly common point of discussion this past year - and just this week - at JCEB and the consensus was that the change in CEO is not intended to override the ability to use the prior year's median employee determination process. This is just one area where language in the rule is imprecise in a number of areas when applied in the year 2 context.
--Broc Romanek, Editor, CompensationStandards.com 5/10/2019
RE: I haven't heard anything from the SEC, but based on this summary of recent Congressional testimony from other interested parties, it doesn't sound like those rules are on the agenda anytime soon.
--John Jenkins, Editor, CompensationStandards.com 5/2/2019
RE: Based on findings from the 2016 Domestic Stock Plan Design Survey, cosponsored by the NASPP and Deloitte Consulting:
75% of dividend-paying companies report that restricted stock awards are eligible for dividends, 78% for RSUs
For restricted stock:
- 51% pay dividends to employees in cash when paid out to the shareholders
- 29% pay dividends to employees in cash when underlying award is paid out
- 18% reinvest dividends into additional restricted stock and pay to employee when underlying award is paid out
- 2% payment decision up to the employee
For RSUs:
- 40% reinvest dividends into additional restricted stock and pay to employee when underlying award is paid out
- 34% pay dividends to employees in cash when underlying award is paid out
- 23% pay dividends to employees in cash when paid out to the shareholders
- 3% payment decision up to the employee/other
In summary, for restricted stock, 51% pay dividends when paid to shareholders, and 47% wait to pay dividends until the underlying award is paid out. For RSUs, 74% wait to pay dividends until underlying award is paid out, and 23% pay out at the same time as shareholders.
--Broc Romanek, Editor, CompensationStandards.com 4/9/2019
RE: There's no formal NYSE guidance that has been published. But this is a position that NYSE has informally signed off on. The logic is that the MLP partnership agreement only allows unitholders to vote on certain matters, which typically do not include equity compensation plan matters. I have taken this approach for two MLPs now. You should email Cindy Melo (Manager of NYSE Regulation) with your fact pattern and request concurrence that your MLP does not need unitholder approval to amend/adopt an equity compensation plan. I received an email from Cindy, who was in agreement, both times I reached out.
--4/9/2019
RE: Maintaining a 50-state blue sky survey is a full-time job for some lawyers at bigger law firms (as there are constant changes) - but I believe this issue only comes up if you don't register on an S-8.
In the March-April 2005 issue of The Corporate Counsel, this issue was addressed: "What's the consequence if some plan transactions technically end up not being covered by S-8? The Staff prefers registration, because it wants the higher liability standards of Section 11 and 12(a)(2) to apply. If not enough shares are registered, some purchasers may have a rescission right, there may be Enforcement exposure, and Blue Sky law exemption/ qualification of non-listed issuers may be affected in certain states ( e.g., Pennsylvania). Moreover, counsel may be unable to issue a clean legal opinion (in a deal, etc.), and the auditor may get nervous. How could the alternative of registering on a gross counting basis be more burdensome than toiling with the auditor over whether there is an internal control problem lurking here, or worse?"
--Broc Romanek, Editor, CompensationStandards.com 9/22/2005
RE: How does the S-8 help with state/blue sky compliance? I was thinking plan awards that are derivative securities (RSUs, DSUs, phantom stock, etc.) may be "covered securities" if they are considered equal rank to a listed security, but I'm not aware of SEC guidance on this point. Do you know?
--4/3/2019
RE: Some states have language in their employee plan exemptions that limits its application to securities that are registered under the Securities Act or are issued under Rule 701. (Ohio is one - See OAC 1301:6-3-03E(5)). If you're an Exchange Act reporting company, you aren't eligible for Rule 701, so if you didn't have an effective S-8, you wouldn't be able to rely on this exemption if you needed it.
Whether you need an exemption or not depends on whether the derivative securities you're issuing are "covered securities." Unfortunately, I don't think there's anything definitive from the SEC or the courts on that. But I can tell you that the Blue Sky folks probably think there is some uncertainty as to whether they are included in the "equal or senior in rank" language.
That's because the 2002 Uniform Securities Act added language in the section exempting covered securities to exempt options, warrants & rights, which at least one commentator on that Act has said "are not themselves federal covered securities under NSMIA." (Robert N. Rapp, Blue Sky Regulation, Section 7.04, 2nd Ed.) While the existence of this language may potentially help you in the states where it's been enacted, it may also provide other states with an argument that your derivative securities aren't covered securities under NSMIA. 2004).
--John Jenkins, Editor, CompensationStandards.com 4/3/2019
RE: I think this would depend upon whether the the company plans to issue under the plan solely to those who are existing security holders in which case this would likely work (but still may require a NY notice filing), or if the issuer intends to issue/sell "to the public" and those not yet a security holder (security holder includes option, warrant, note holders) and this reliance won't work because of the agent issue. I'm assuming these are "plans" as would be defined as employee benefit or similar compensatory plans?
--Broc Romanek, Editor, CompensationStandards.com 7/8/2010
RE: Yes, as this Jones Day memo points out, spring-loading can be an issue with virtually any type of equity grant:
"Although the media focus to date has been on stock option plans because of the accounting and tax implications, similar issues may arise for restricted stock, restricted stock units, or other equity-based forms of compensation where the timing or value of the grant is tied to the value of the award."
--John Jenkins, Editor, CompensationStandards.com 4/1/2019
RE: You are correct - amounts for plans specifically referenced in Item 402(a)(6)(ii) need not be included in the compensation tables. Item 402(c)(2)(ix)(F) would pick up the amounts paid for life insurance available to the NEOs that is only available on a discriminatory basis. So, for example, premiums paid on your typical group life insurance plan available to all salaried employees would not need to show up in the All Other Compensation column of the SCT.
One thing that I always like to point out about Item 402(a)(6)(ii) is that it is an exclusive list - so if you have a non-discriminatory benefit plan that is not a life, health, hospitalization or medical reimbursement plan, then you have to include the compensation arising under the plan in the All Other Comp Column (or another appropriate column) of the SCT, even if it is non-discriminatory.
--Dave Lynn, Editor, CompensationStandards.com 10/4/2007
RE: I can ask around for sample agreements. In the meantime, if you haven't checked out the transcript from our recent webcast on cyrpto compensation, that could also be a good resource. It lists some drafting issues to think about and has a lot of other info. It's posted in our "Cryptocurrency Comp" Practice Area.
--Liz Dunshee, Editor, CompensationStandards.com 3/27/2019
RE: Alan Dye notes: I don't think it's necessary to characterize a perk or other personal benefit as a perquisite. The rule and the interps included in the adopting release refer to "perquisites and other personal benefits," which indicates that a perk is a personal benefit, and there may be other "items" (as the guidance says) that are 'personal benefits' even if not characterized as a 'perk.'
I'm not sure what might constitute a personal benefit but maybe not a perk, but I don't think it matters--both are personal benefits, and they can be characterized as such in the proxy statement. They'll have to be described with some specificity in the description of the "all other comp" number, so that no one is going to be misled by calling them a 'personal benefit' instead of a 'perquisite.'
--Broc Romanek, Editor, CompensationStandards.com 3/8/2019
RE: I'd adjust all the awards that have been affected by the stock dividend. Check out Alphabet's 2017 proxy statement and footnote 2 to the Outstanding Equity Awards table.
--John Jenkins, Editor, CompensationStandards.com 3/4/2019
RE: Reviewing Alphabet's proxy was very helpful, thank you very much.
-- 3/5/2019
RE: I don't think that's permitted. I think the advice in the old telephone interps still represents the Staff's position on changing the language of the tables:
"The compensation disclosure rules do not, as a general rule, permit registrants to deviate from the highly formatted tabular presentations required except to omit any column or table otherwise not applicable. A limited exception has been made for the caption of column (b) in the Option/SAR Exercise table. The caption to that column may be modified to read: "Number of securities underlying options/SARs exercised." In all cases, the gross number of securities underlying the options/SARs exercised should be reported in this column."
--John Jenkins, Editor, CompensationStandards.com 2/8/2019
RE: In practice, most companies don't do that, although I recently looked at Apple's and they do. Most of the tables I've seen reference the most recent year (that's what Microsoft does. Some just use "Summary Compensation Table" as a title. Most will reference the 3 fiscal years in the lead in paragraph to the tables in any event.
--John Jenkins, Editor, CompensationStandards.com 2/7/2019
RE: Mark Borges notes: I believe that this situation is addressed by Instruction 2 to Item 402(u): “If it is no longer appropriate for the registrant to use the median employee identified in year one as the median employee in years two or three because of a change in the original median employee’s circumstances that the registrant reasonably believes would result in a significant change in its pay ratio disclosure, the registrant may use another employee whose compensation is substantially similar to the original median employee based on the compensation measure used to select the original median employee.”
It seems to me that the departure of the original median employee from the company is the type of change in circumstances that is contemplated by this provision. Thus, I believe that this provision would apply. Consequently, I would recommend using another employee from the company’s original determination of the median employee with substantially similar compensation as the original median employee as the new median employee for purposes of year two. This would avoid the need to identify a new median employee, and also sidesteps the question of whether it is advisable to use an individual who is no longer with the company as the median employee in year two.
Of course, I would add a brief statement explaining that the original median employee has been replaced by another individual whose actual total compensation for year two is being compared against the year two compensation of the Chief Executive Officer to come up with the year two pay ratio.
--Broc Romanek, Editor, CompensationStandards.com 1/3/2019
RE: The rule hasn't changed at this time. There's been some confusion over this, because the SEC originally proposed to delete Item 201(d) and the references to it in Part III of Form 10-K and Item 10(c) of Schedule 14A. And that deletion was reflected in the "Demonstration Version" that was initially published when the rule was finalized. But page 54 of the final rule actually says that the SEC is retaining the disclosure requirements and referring them to FASB for potential incorporation into GAAP. This "non-change" is reflected in the final "Demonstration Version" that was conformed to the Federal Register.
--Liz Dunshee, Editor, CompensationStandards.com 12/17/2018
RE: Mike Melbinger notes: That is a fairly common practice for director awards with a one-year vesting schedule
--Broc Romanek, Editor, CompensationStandards.com 12/14/2018
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